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Treasury sweetens short-tenor roads bond in rush to catch up

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The National Treasury building in Nairobi. Latest Kestrel update shows State had borrowed Sh62.3bn by end of October. FILE PHOTO | NMG

The Treasury is looking to increase the pace of domestic borrowing in the current fiscal year by offering higher yields on this month’s infrastructure bond, analysts say.

Kestrel Capital’s latest government borrowing scorecard shows the Treasury had borrowed a net of Sh62.3 billion by the end of October, which is just two months shy of the halfway mark, for the fiscal year.

This works out to 22.6 per cent of the initial domestic borrowing target of Sh275 billion, or 15 per cent of the revised target of Sh410 billion.

The government is in the market for Sh30 billion for the seven-year bond, whose tenor is deemed short by market players considering that most infrastructure bonds tend to be nine or 12-year papers.

“Treasury is offering a short-dated high coupon bond to raise the cumulative bid-to-cover ratio, auction subscription rates and raise new borrowing levels,” said Kestrel head of fixed income Alexander Muiruri in the report.

The bond prospectus published by Central Bank of Kenya, the government’s fiscal agent, sets the coupon rate of the tax-free bond at 12.5 per cent. October’s shorter five-year bond paid a coupon of 12.5 per cent minus tax.

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The infrastructure bond will partially fund projects in the roads sector (Sh10 billion), energy (Sh15 billion) and water (Sh5 billion).

Lower appetite

Investors have shown a reduced appetite for government debt this year, partly due to tight liquidity in the market and the economic upheaval caused by an extended political season.

The bid-to-cover ratio for the first five months of the year — which compares the number of bids received in an auction to the number of bids accepted — is at its lowest since 2012.

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A higher ratio indicates higher demand for government securities from investors. It stands at 1.1 this year, compared to 1.2 at a similar point in 2016/17 and 1.8 in 2015/16.

The pressure to borrow will also continue to exert upward pressure on rates according to analysts at Commercial Bank of Africa, especially with the State yet to dip into the external market for funds.

“The present need to bridge the revenue gap continues to signal higher interest rates particularly in the domestic market,” said CBA in their latest fixed income report.